On the valuation of American exchange options: an analytical approximation

Abstract

We adopt a quadratic approach to the valuation of the option to exchange one asset for another, when the option owner has the right to exercise before option expiration. Accurate pricing results are obtained and tested against competitive models in the literature, building on the hypothesis that option value is the product of two functions, one being a function of time and the other one being a function of the stock prices.

Acknowledgements

I thank S. Tuluca for a fruitful discussion.